Nominal Wage Rigidity Prior to Compulsory Arbitration: Evidence from the , 1902-21

Andrew Seltzer; Royal Holloway, University of London André Sammartino; University of

Abstract Studies across a wide range of countries have shown that relatively few workers have received year-to-year wage cuts since the Second World War. However, there is very little micro-level evidence from earlier years, when lower inflation rates and a less regulated labor market may have led to stronger downwards pressure on wages. This paper examines wage adjustment at the Victorian Railways, Australia between 1902 and 1921. It is shown that, despite strong downwards pressure on wages, nominal wages were rigid downwards and a high proportion of triennial wage changes were exactly zero. Even for workers with very long tenure and in years when the national price level declined, wage cuts were rare. We also show that the characteristics of workers whose wages were unchanged were very similar to those receiving wage cuts. Finally, we show that unlike the wages of incumbent staff, entry wages for new junior staff frequently declined from year to year.

Keywords Victorian Railways, Australia Downwards nominal wage rigidity; Internal labour markets;  JEL Classification

N37  J31  J41 1. Introduction Economists dating at least back to Marshall (1887) have observed that nominal wages are much stickier downwards than would be suggested by spot market models of labour supply and demand. For the period since the Second World War there have been numerous studies across a wide range of countries documenting downwards nominal wage rigidity (DNWR), or the failure of firms to cut nominal wages.1 However, there is much less evidence for the period prior to the Second World War, when lower average inflation rates, extended periods of deflation, weaker unions, and the absence of compulsory arbitration may have led to far greater wage flexibility.

1 A non-exhaustive list of recent studies includes Akerloef, et al. (1996), Altonji and Devereux (1999), Bewley (1999), and Kahn (1997) on the United States; Fehr and Goette (1999) on Switzerland; Dwyer and Leong (2003) on Australia; and Nickell and Quintini (2003) on the United Kingdom; and Knoppik and Beissinger (2003) on Germany. See Dickens et. al. (2007) for a broader survey. Chappel (1996) on New Zealand; Elsby (2004) 1

This paper examines whether nominal wages of a large group of Australian employees were rigid downwards using microdata from the Victorian Railways (VR) from 1902-21.2 From its inception in the mid-nineteenth century, the VR was organized as a large-scale quasi-public bureaucracy. Its wage budget was set each year by the Victorian Parliament. Wages and salaries of individual workers were set by the Victorian Railways Commissioners, a public body-corporate, created by the Victorian Parliament in 1883. From at least the late 19th century (and most likely back to its origins in the 1850s), the VR maintained internal labour markets with long-term employment relationships, internal promotion, and implicit rules governing wages (Sammartino, 2002). Beginning in 1883, the Victorian Parliament required the VR to publish a list of its employees and their positions in the Government Gazette on a triennial basis. From 1902, this list contained wages (, Parliament, 1902b- 1921c). We use a sample of all employees with surnames beginning with A, B, and C to construct a panel data set covering the period between 1902 and 1921, which we use to examine wage adjustment. These micro-level data are well suited to addressing the issue of DNWR because the same set of workers is observed on repeated occasions and one can be certain that declines reflect individual-level wage cuts. Although these data have been used elsewhere to analyse various human resource management practices at the VR, we believe that this is the first attempt to study whether it shielded its workers from the external labour market by protecting nominal wages. Although the evidence in this study comes from a single firm, there are several reasons why the results are of broader interest. First, the VR was the largest employer in Victoria, employing roughly two thirds of State employees in the late 19th century (Butler-Bowden, 1995). It was also, along with the New South Wales Railways, one of the two largest employers in Australia. Its sheer size meant that its employment practices directly affected large numbers of workers. Its position as the largest employer in Victoria gave it a degree of monopsony power, and thus its employment practices may have constrained other employers. Second, there currently exists a very small literature that quantitatively examines employment practices in Australia during the period shortly after the establishment of compulsory arbitration.3 In the absence of broad-based employment surveys, case studies of firms with surviving employment records provide the best available means to build a broader picture of employment practices. Third, the period 1902-21 followed the most severe deflation in Australian history. Prices dropped by 37.2 percent between 1882 and 1897 and remained below 1882 levels until the First World War. Such a regime of deflation was unlikely to give rise to a social norm of nominal wage rigidity, and thus it is unlikely that there were

2 The VR paid most workers an hourly wage; but approximately 19 percent (mainly clerks) were paid an annual salary. Throughout this paper we use the term “wage” to describe both types of pay. 3 Compulsory arbitration was first introduced to Victoria with the 1896 Factories Act, as a way of keeping industrial peace following the defeats of the Maritime Strike in 1890 and the Shearers Strike in 1891. Federal compulsory arbitration began with the Harvester decision in 1907.

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particularly strong institutional barriers to cutting wages. Fourth, the VR employed large numbers of both blue- and white-collar staff. The only previous work of which we are aware on DNWR in Australia prior to the Second World War focuses solely on white- collar workers in banking (Seltzer, 2009). However, studies on the post-war period have found substantial differences in the degree of DNWR for different types of workers; in particular, blue collar workers are much more likely to take nominal pay cuts (Nickell and Quintini, 2003). Finally, studies of other railroads in the late 19th and 20th centuries have shown that there were broad similarities in personnel practices, and thus it is likely that the practices outlined here were fairly representative of railroads internationally (Morgan, 1995; Hamilton and MacKinnon, 1996; Howlett, 2000; Sammartino, 2002). The layout for the remainder of this paper is as follows. The first section examines existing evidence on pre-war wage adjustment in Australia (and, to a lesser extent, internationally), drawn primarily from previously constructed wage series and studies of industrial relations. The second section briefly describes the history, operations, and labour relations of the Victorian Railways in the context of the broader Victorian labour market of the period. The third section describes the Government Gazette data. The fourth section presents empirical evidence on wage adjustment at the VR, focussing on the frequency with which nominal wages were cut or left unchanged, the determinants of these wage change outcomes, adjustment of real wages, and adjustment of entry-level wages. The fifth section concludes. The main findings are as follows. There is strong evidence that nominal wages were rigid downwards. Triennial wage increments clustered at zero change. Wage cuts were very rare, except for workers who were demoted. Regression analysis shows that the characteristics of workers and time periods with a relatively high probability of wage cuts were very similar to those with a relatively high probability of unchanged wages, suggesting that the VR essentially substituted leaving wages unchanged for cuts in most instances. Real wages were more flexible than nominal wages, but only adjusted downwards during periods of inflation. Finally, unlike the wages of incumbents, wages of new entrants were fairly flexible, and entry wages decreased routinely. Taken as a whole, the results suggest that downward nominal wage rigidity was a prominent feature of early 20th century employment practices in at least some large Australian firms.

2. Existing Literature The theoretical framework for this study comes from a large Keynesian and New Keynesian literature. Keynes (1936) argued that unions strongly oppose wage cuts, and thus in a heavily unionised labour market there is a tendency for DNWR to emerge. The continued presence of DNWR in developed economies during recent decades when union coverage has declined has led economists to seek alternative explanations for its existence. The New Keynesian literature has explained DNWR using micro-founded

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models that do not presume, but may be reinforced by, unionisation. Each of these models assumes that workers have fundamental preferences regarding wage cuts. Survey and experimental work examining fairness and loss aversion has generally confirmed the prevalence of such preferences (Kahneman and Tversky, 1979; Kahnman, Kneitsch, and Thaler, 1986). Blanchard and Summers (1986) and Lindbeck and Snower (1988) have argued that incumbent workers may possess firm-specific knowledge, which makes them costly to replace. This gives insiders bargaining power which they can use to extract rents and protect themselves from wage cuts. Importantly, this model predicts that while there will be an absence of wage cuts for incumbent employers, the wages of new entrants will be much more flexible. Akerlof and Yellen (1990) argue that if workers believe wage cuts to be unfair, they may respond by withholding effort. Profit-maximizing firms will choose to leave nominal wages unchanged following downward shocks if the cost of lower worker effort exceeds the savings from wage cuts. A second strand of the literature argues that the prevalence of DNWR in modern economies owes more to the characteristics of modern labour markets than to the fundamental preferences of workers. According to this view, there would be far more wage flexibility in labour markets with different characteristics, such as those prior to infrequency of wage cuts in the United States since the Second World War may stem the Second World War. Gordon (1982) and Hanes and James (2003) argue that the from a social norm that has evolved in a period of relatively high inflation. The absence of nominal wage cuts is likely to have low costs in an inflationary environment because real wages remain flexible. However, in an environment with very low or negative inflation, such as that which existed at the start of our sample period, a norm of no nominal wage cuts would be costly and would not survive. Hall (1980) argues that in a long-term employment relationship, wages may constitute “instalment payments on a long-term debt”, rather than following productivity in the current period. In this framework, transitory shocks to productivity will not result in lowered wages; however, a series of such shocks (e.g. prolonged deflation) would reduce the value of the long- term debt and thus result in lower wages. Kahn (1997) and Hanes (2000) argue that menu costs can result in a clustering of nominal increments at zero and an absence of small nominal cuts. Nominal cuts will only follow relatively large negative nominal productivity shocks, which are likely to be uncommon in periods of relatively high inflation. There 4have been many studies showing the existence of DNWR across a variety of countries and bargaining environments since the Second World War (Akerlof, et al., 1996; Chapel, 1996; Kahn, 1997; Altonji and Devereux, 1999; Bewley, 1999; Fehr and Goette, 1999; Dwyer and Leong, 2003; Knoppik and Beissinger, 2003; Nickell and

Menu costs also imply an absence of small positive increments. This leads to a clear empirical test of the hypothesis, 4namely that wages changes should be relatively large in absolute value, and there will be no asymetries between cuts and increases.

4 Q . Some of these studies have shown that while wage increases respond to the inflation rate, the absence of wage cuts is uintini, 2003; Elsby, 2004; Dickens et. al., 2007) extremely robust to inflation and bargaining environment (Baker, Gibbs and b; Chapel, 1996; Fehr and Gotte, 1999; ). However, the post-war period has been characterised by positive inflation rates. The presence of Holmstrom, 1994 Elsby, 2004 inflation means that real wages can adjust downwards, even in the presence of DNWR. Prior to the Second World War, when inflation was much lower and there were extended periods of deflation, downwards real wage adjustment may have necessitated nominal wage cuts. The evidence on wage adjustment in Australia prior to the Second World War is sparse.5 Very little of this evidence directly addresses the question of the frequency with which individuals faced nominal wage cuts. Much of the existing evidence on wage adjustment comes from aggregated series. Table 1 provides a list of existing Australian

5 Australia is not alone in this regard. We are not aware of any studies which use broad-based individual-level data on wages prior to the Second World War to address the issue of DNWR. See Seltzer (2010) for a summary of studies using evidence from aggregated data sources and union histories for the USA and UK.

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wage series and the frequency of year-to-year declines in each series. Year-to-year wage decreases are fairly common in the series in Table 1, most of which cover periods prior to compulsory arbitration and with persistently low inflation or deflation. However, a considerable degree of caution is necessary in making the jump from wage cuts in these series to downwards flexibility of individual wages. Aggregated wage series are subject to composition effects, and a decrease in average wages may be due to changes in the composition of workers, rather than to wage cuts for individual workers. For example, during downturns it is possible that new hires were paid considerably less than incumbent staff, high-wage workers were more likely to lose their jobs, or that high- wage firms were more likely to fail, and thus average wages may have declined even if individual wages did not. There is a much smaller literature that uses less aggregated data to examine DNWR - to late-19th century American manufacturing firms using data from the Aldrich Report, a prior to the Second World War. Hanes and James (2003) examine wage cuts in mid broad-based survey of employers. They find little evidence to support the existence of DNWR; nominal wage cuts occur almost as often as increases in their sample. Conversely, Sundstrom (1990) finds much less of evidence of wage flexibility in data from a Ohio Bureau of Labor Statistics survey of manufacturing establishments in the late 19th and early 20th centuries. He finds that, consistent with the recent literature on DNWR, nominal wage cuts occurred infrequently between 1901 and 1910, averaging about 2.3 percent of workers per year and peaking at 7.36 percent during the 1908 recession. However, he also finds that in the earlier and more severe recession of 1893 22 percent of all workers received nominal pay cuts. Sundstrom studies use aggregated data showing the average level of wages within Both the Hanes and James and position at individual firms. Even with this level of aggregation, it is possible that wage decreases actually reflect composition changes, rather than individual-level cuts. To the best of our knowledge, the only existing paper that examines individual-level evidence on wage adjustment prior to the Second World War is Seltzer (2010), which examines evidence from the Union Bank of Australia between 1887 and 1900 and Williams periods were characterised by severe deflation, with Australian prices falling by approximately 33 Deacon’s Bank (Manchester) between 1890 and 1941. These percent between 1887 and 1897 and Britis between 1920 and 1933. These periods were also characterized by downwards h prices falling by approximately 43 percent pressure on wages created by firm-specific and industry-specific shocks and by an absence of wage regulation or unionisation. Despite the institutional environment and strong downwards pressure on wages, nominal wage cuts were very rare except for an across-the-board 10% cut at the UBA in 1895. In 1895 approximately 59 percent of staff received a nominal wage cut; in other years, this figure was under 1 percent. By for the UBA and 27.3 contrast, in approximately 46.6 percent of sample observations 6

percent for WDB and percent for individuals with a tenure of at least 20 years), wages were left unchanged from the previous year. A second important (74.8 49.0 conclusion is that, consistent with insider-outsider models, the wages of new recruits responded to shocks very differently than those of incumbent staff. The average starting wage for junior staff decreased from year to year about as frequently as it increased. The history of Australian industrial relations provides a second source of evidence on the relative frequency of wage cuts.6 Although this literature does not provide any quantitative evidence, it does suggest that wage cuts were fairly common prior to compulsory arbitration. Much of the early history of trade unionism in Australia concerns unions’ responses to wage cuts. In the late 1860s and early 1870s, many industries experienced substantial decreases in wages, and broad expansion of trade union activity followed as a result (Sutcliffe, 1921). For example, the Bendigo Miners’ Union was established in 1872 to “resist attempts to reduce wages” resulting from immigration-led growth in the labour supply (Sutcliffe, 1921, pp. 27-28). The frequency and intensity of industrial action over nominal wage cuts increased dramatically during the depression of the early 1890s. The severity of the depression and defeat of major strikes by the shearers and maritime workers resulted in significant wage cuts across a wide range of industries (Sutcliffe, 1921; Svensen 1995). Strikes against wage cuts did not disappear with the establishment of compulsory arbitration; for example, in 1929 there were large strikes against arbitrated wage cuts in the coal and timber industries (Portas, 1971). Most of the literature on DNWR only addresses wage setting in the private sector, whereas the VR was a public firm. Public sector employment differs from that in the private sector in a number of important respects (Gregory and Borland, 1999). Public sector wages are set through administrative processes that are less responsive to the external labor market. Union density is typically higher in the public sector. Employment is generally more stable and long-term in the public sector. The overall wage bill for a public sector employer may be set by budgetary process which establishes “cash limits” prior to the commencement of wage bargaining (Leslie, 1985). The literature has generally concluded that these differences lead to different wage outcomes; however, very little of this literature has specifically addressed the subject of wage rigidity. To the extent that DNWR has been addressed, scholars generally believe that the characteristics of public sector labor markets described above are likely to lead to greater wage rigidity than in the private sector (Leslie, 1985 and Nickell and Quintini,

6 There also exists a lengthy international history of union activity against wage cuts. In 1830 the National Association for Protection of Labour, Great Britain’s first broad-based union, established a central fund that was “to be used only for strikes against cuts in wages” (Pelling, 1987, p. 28). During the late 19th and early 20th centuries coal miners, engineers, railwaymen, textile workers, and transport workers went on strike against wage cuts, culminating in 1926 with the General Strike against widespread post-war wage reductions (Pelling, 1987; Laybourne, 1992). In the United States, where unions were much more decentralised, there were 2,806 strikes between 1901 and 1933 over the is

sue of wage cuts, about 15.4 percent of the total 7strikes over the period (Mitchell, 1985).

2002). The relatively limited evidence on nominal wage rigidity in the public sector has

in provided some support for this view. Routh (1954) provides data on wage scales in the Table 1.7 Across 11 occupational categories, cuts in the overall wage scale occurred in British Civil Service between 1890 and 1940, which can be compared to the series 11.0 percent of years and unchanged wages occurred in 58.6 percent.8 The data includes two periods of severe deflation (1892-96, when prices dropped 8.0 percent and 1920- cuts to the wage scales is suggestive of downwards wage rigidity. Nickel and Quinitini 33, when prices dropped 43.9 percent), and thus the relative infrequency of (2003) provide estimates of the extent of DNWR in the UK public sector using individual-level data from the New Earnings Survey covering the period 1975-99. They show that wage cuts in the public sector closely track those in the private sector, and that unionized public sector employees were only slightly less likely to receive pay cuts than otherwise similar non-unionized private sector employees.

3. Institutional Background The Victorian Railways Department was created in 1856 under the auspices of the Commissioner of Public Works. Thereafter it began to acquire existing privately run railway companies, and by 1878 it owned and operated the colony’s entire rail network. As such, it was a publicly owned monopoly supplier of rail transport and monopsony buyer of many inputs, especially specialised labour. During the period of this study, the VR was, along with the New South Wales Railways, one of the two largest employers in Australia. In 1889 the VR employed 11,801 permanent and 1,309 temporary staff (Victoria, Parliament, 1892e).9 In 1921-22, these figures were 19,273 permanent staff and 7,688 temporary staff (Victoria, Parliament, 1922e).10 Because it was a public corporation, the VR was subject to government regulation of its employment practices. For our purposes, the most important of these regulations came from the 1883 Railways Management Bill (Victoria, Parliament, 1883a). The Bill replaced managerial discretion in personnel practices with bureaucratic processes;

7 Routh’s series cover wage scales, and it is not possible to infer the extent to which individual wage outcomes differed from those of the scales. 8 The categories (and percentage of observations with wage cuts) are permanent heads (2.0), administrative (13.7), executive (9.8), clerical officers (7.8), clerical officers writers (11.8), women clerks (11.8), manipulative a (11.8), manipulative b (9.8), manipulative w (9.8), engineering a (11.8), engineering b (11.8). 9 Parliament, 1888-89f). The number of staff at the VR was far greater than the numbers employed by the Victorian To put these figures into perspective, in 1889 total public employment in the colony was 31,408 (Victoria, naval forces (930), and customs officials (312). Another obvious comparator is the manufacturing sector, which employedGovernment 56,27 in capacities1 individuals such (Victoria, as teachers Parliament, (4,550), police1888- 89f).(1,462), The post number and telegraphemployed employeesby the VR (2,455),was greater land than and twice the total employed in every manufacturing industry, except “engine and machine makers, iron foundries” (7,300) and “saw mills, moulding, joinery, cork cutting works” (6,558). 10 Temporary staff were probably a mix of short-term seasonal and cyclical workers and probationary long-term staff. The various Railways Acts had provisions stating that temporaries could not be re-employed within 6 months of termination (1883, 767, section 26) and that day labourers continuously employed for a period of least 2 years (later

1891 and 1903, temporary staff ranged were5 years) used may more be madefrequently permanent in the withoutExisting probation Lines Department (1891, 1250, (on sectionaverage 34 23.5% and 1896, of staff) 1439, than section in the 22). Between (9.1%) or Traffic Departments (8.0%) (Victoria,from 4.4 Parliament, percent to 25.41891 percent-1903e). of total employment at the VR. Temporaries

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establishing procedures for advertising appointments, hiring and probationary periods, and for promotion of existing employees. It also shifted the responsibilities for running the railways away from the Minister for Railways toward the Victorian Railways Commissioners, an independent public body−corporate created under the Bill. Among their other powers, the Commissioners were responsible for setting wages at the VR, subject to a budgetary allocation given to them by the Victorian Parliament. This wage setting process continued until 1921, after which time wages were set though Federal compulsory arbitration. Perhaps most importantly for the purposes of this paper, the Bill required the VR to publish a list of its employees every three years in the Government Gazette. The data from these reports, which are described in further detail next section, form the basis for this study. Wages at the VR were constrained by the annual budgetary allocation from the Victorian Parliament. Throughout the period of this study, the Victorian Parliament felt a need to rein in Railways spending and generally granted relatively low increases in the overall wage bill per worker. Table 2 shows nominal and real expenses, along with the number of permanent staff employed by the VR for each of the sample trienniums.11

the full sample period. However, much of this increase was offset by inflation, and real Nominal expenses per worker grew 31.8 percent prior to the War and 94.3 percent over expenses per worker grew by about 15% over the period. Both of these figures mask substantial cuts in 1905 and again in 1911. Another important institutional constraint was the presence of trade unions at the VR. Throughout the period of this study, union members made up a majority of the VR’s workforce (Butler-Bowdon, 1991). The unions, however, were relatively non-militant, and during the period of this study were not directly involved in the bargaining process. Most union members were career railwaymen, and “often thought of themselves first as public servants with an interest and a pride in keeping the trains running” (Turner, 1965, p. 13). After the defeat of a 1903 strike by the Engine Drivers’, Firemen’s, and

11 Unfortunately, the Annual Reports do not provide data on the overall wage bill between 1900 and 1919. However, the wage bill is likely to be strongly correlated with total working expenses as wages and salaries were the VR’s single largest expense. The Annual Reports do provide information on the wage bill beginning in 1920. In 1920, the total

Parliament, 1921e). Data from the 1920s Annual Reports suggest that ratio of the wage bill to total working expenses wasworking fairly expenses constant ofover the time. VR was £7,835,756 and the total spent on wages and salaries was £5,895,347 (Victoria,

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Cleaners’ Association, the unions served mostly as a voice mechanism for its members, airing grievances such as individual members’ pay levels, hours, or overtime.12

Another set of important institutional constraints was created by the external labour market and government regulation. Although the VR was covered under a separate set of wage regulations from the rest of the labour market and probably possessed some degree of monopsony power due to its sheer size, it nonetheless had to compete in the external labour market for at least some workers, especially those with non-railway- specific skills. The Victorian blue-collar labour market was perhaps the most heavily regulated in the world during the period of this study. Under the 1896 Factories Act, “special wage boards” were set up for a number of occupations to eliminate “sweated” industry-specific minimum wages. With the exception of the period between 1903 and labour practices (Hammond, 1914). Among their other powers, the boards could set 1905, when the Irvine Government effectively gave employers veto power over any minimum wage proposals, subsequent amendments to the Factories Act generally increased the scope of government regulation. In 1913, there were 1 boards, which set minimum wages for an estimated 150,000 workers, about 25 percent 34 Victorian special of the State’s workforce.13 Prior to the First World War, the special boards generally left minimum wages unchanged from year to year – 93.9 percent of changes in the minimum rates between 1901/02 and 1909/10 are exactly zero (Victoria, Parliament, 1902-10b). However, early in the period decreases in the minimum rates occurred as frequently as increases – -zero changes between 1901/02 and – whereas later in the period wage cuts vanished and wage 54.5 percent of non 1904/05 were cuts percent in 1915/16). In addition to State regulation, from 1907 there existed increases became increasingly common (14.9 percent of all changes in 1907/8 and 32.0 compulsory arbitration at the Federal level. In 1913, 6.7 percent of all wage changes nationally were legislated by the Commonwealth Court of Conciliation and Arbitration (Withers, 1987). This figure increased to 13.6 percent by 1920 and 58.9 percent by 1929.

In order to see the how external factors may have affected wages at the VR, Figure 1 shows the nominal wage and price levels over the period of this study. The wage series are from Williamson (1995) and The special board wage

12 The 1903 strike resulted from a series of cumulativePope andgrievances Withers over workplace (1994). terms and conditions and political representation. The main issues over terms were a series of wage freezes and cuts; the practice of placing workers on “short time” (i.e. cutting the workweek for hourly workers); and deterioration of the rolling stock, which hadn’t been upgraded since the 1880s (Benham and Rickard, 1973). The main issues of representation were first, the membership of the Engine Drivers Association in the Trades Hall Council (the main representative body of trade unions) and, second, a Victorian law which put railways workers onto a separate electoral role which elected two separate seats in the State Parliament (Benham and Rickard, 1973). The strike ultimately failed and 132 men were “dispensed with”, 60 of whom were never reinstated (Churchwood, 1983). 13 . According to Census records there were

See Hammnond (1914) on coverage under the special wage boards 425,000 men and 132,000 women in the Victorian workforce10 in 1911 (Vamplew (1985), series LAB16 and LAB25).

series, which are drawn from the Reports of the Chief Inspector of Factories, Work- Rooms, and Shops, show an index of wages of “males employed at the minimum wage or 35 over” (Victoria, Parliament, 1902-21b). The series are constructed as It = ∑π1902, jWt, j , j=1

where π1902, j is industry j’s 1902 share of employment in industries covered by a special

wage board and Wt, j is the average wage in industry j at time t. The price series is from Vamplew (1987), series PC31. It is evident that there was a small14 decline in wages and rapid increase during the war years. Figure 2 also shows that the series closely track prices between 1902 and 1905, a slow rate of increase between 1905 and 1914, and each other, suggesting a degree of competition in the Victorian labour market. In addition, these series also closely track the VR’s real working expenses per member of staff (shown in Table 2).

4 Data The Government Gazette reports the birth date, starting date, position, and branch at the VR for each employee on a triennial basis (Victoria, Parliament, 1902b-21c). Beginning in 1902, it also reports wages.15 A sample page of the Government Gazette is

The Special Board series show the average wages of covered workers rather than minimum wages. We can not construct14 a series using the minimum rates because each board set several different minimum rates for different types of workers in the industry and the Reports of the Chief Inspector does not provide data on the number of employees in each occupation. 15 In the empirical analysis we have converted hourly wages into an annual wage assuming a 50 week year and a 5½ day week, which were the standard hours for most workers (see Victorian Railways Regulation No. 56 in Victoria, Parliament, 1912c), pp. -

4289 4420). 11

shown in Figure 2. This paper uses a sample of all VR staff with surnames beginning with A, B, or C for the years 16 This produces a large sample, with 3,251 staff, 15,686 man-years of data (an average of 1902, 1905, 1908, 1911, 1914, 1918, and 1921. 1,695 per year), and wage increments. The Government Gazette reports nominal wages, and we deflate these using Vamplew, PC31 (base year 1911). 11,894

The Government Gazette records 13 different branches over the sample period, but percent of sample staff-years were in the Locomotive, Traffic, or Ways and Works branches.17 These three main branches were sufficiently large and had sufficiently 94.3 distinct functions and skill requirements to support their own internal labour markets. For example, a typical employee in the Locomotive Branch started as an engine cleaner and over time might have worked their way up to fireman or driver. Employees in the Traffic Branch followed several distinct career paths – clerk/stationmaster, porter/assistant stationmaster/stationmaster, porter/shunter/guard, etc. Staff rarely

16 The enormous size of the VR meant that it was not practical to collect information for all staff. However, our sample contains a large and fairly random sub-set of all VR staff. Sammartino (2002) shows that the distribution of branches in the A to C sample corresponds closely to the distribution of all staff at the VR. 17 The Locomotive Branch was responsible for the “design, construction, operation and maintenance of all and rolling stock” (Harrigan, 1962, p. 126). The Traffic Branch encompassed “all jobs that revolved around the timetable, such as station staff, guards, and signalmen” (Butler-Bowdon, 1991, p. 57). The Ways and Works Branch had responsibility for the “maintenance of tracks, bridges etc.; construction and maintenance of station buildings and other works; installation and maintenance of signalling, interlocking, telephone and telegraph equipment” (Harrigan, 1962, p. 126). In 1899-1900 the Locomotive, Traffic, and Ways and Works branches employed 29.0, 37.9, and 30.1 percent of VR staff, respectively.

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moved between these branches.18 It is likely that the existence of distinct internal labour markets meant that wage adjustment differed across different types of workers. To account for this, in our empirical analysis we include dummy variables for the 3 main branches. In addition to recording branches, the Government Gazette also records job titles. The sample contains 763 distinct titles. It is likely that workers in different jobs had different outside opportunities, as some positions (such as carpenter or blacksmith) were trades that utilised skills which were easily transferable to other industries while others (such as signalman or engine driver) required primarily railway-specific skills. It is also likely that staff in different branches had different propensities to join unions.19 We have classified positions into three categories, blue collar (fireman, labourer, blacksmith), white collar (clerk, accountant, stationmaster), or miscellaneous service (porter, guard, engineer).20 Blue collar and service workers had jobs which required physical strength, and thus may have been more likely to experience productivity declines (and thus wage cuts) with age. As a robustness check we have also performed our empirical analysis using a dummy variable for being paid an annual salary (instead of an hourly wage) instead of the white and blue collar dummies. The correlation between white collar and salaried is .86, and the regression results are qualitatively similar to those reported in the paper. Changes in job titles are common in the data, occurring in approximately 65 percent of observations. A priore one would expect moves, especially promotions and demotions, to be important determinants of wage adjustment. Following Baker, Gibbs, a), we primarily use patterns of movement between different job titles to identify promotions and demotions. We have tried to avoid using information and Holmstrom (1994 about salaries to identify promotions and demotions as our underlying objective in constructing these variables is to determine the effect of promotion and demotion on salaries. In most cases, moves were part of normal career progression (e.g. cleaner to fireman) and determining whether a move was a promotion was straight forward. For most non-standard moves, we looked at job titles (for example, moving from lad porter to clerk would have been considered a promotion) or position in the hierarchies at the relevant branches (for example, moving from fireman to stationmaster would have been considered a promotion). In the few remaining non-standard moves, we had to resort to

18 There are 3,507 employees in the sample who worked in one of the 3 main branches for at least one sample observation. Among them, only 186 (5.3 percent) were observed in more than one of these branches during the sample period. 19 Although there does not exist any information on whether individuals belonged to unions and there is only fragmentary evidence on overall union membership, it seems likely that white collar staff were less unionised than blue collar staff. Most of the original unions were for blue collar trades such as the Enginemen’s Association; the Engine Drivers, Firemen and Cleaners Association; the Locomotive Workshops Union; the Gangers’ Society; the Carriage Builders’ Association; the Guards and Shunters’ Association; the Signalmen’s Association; the Traffic Union; and the Amalgamated Rollingstock Society. Almost all of these were formed before the first white collar union, the Clerical Association (Sammartino, 2002). 20 A complete list of classifications is available on request from the authors.

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using information about average salaries in the two positions to determine whether a move was a promotion or demotion.

5. Empirical Results In our analysis we pool the data across all sample trienniums. However, the evidence from the previous sections suggests that wage freezes and cuts were more likely to occur during the 1902-05 triennium than afterwards. Between 1902 and 1905 the VR had to face the Irvine Government’s budget cuts, deflation, and a slumping external labour market. In addition, this triennium shortly followed the severe deflation of 1882- 97 and the defeat of major strikes by the shearers and maritime workers. It is likely that these events would have led to a greater need for and acceptance of wage freezes or cuts at this time than would have been the case later in the period of this study. Thus we report some results separately for this triennium. We begin our analysis of wage adjustment in Figure 3 by showing the distribution of the percentage nominal wage increments across all sample trienniums. Figure 3 also shows a normal distribution with the same mean and variance as the distribution of

14 actual wage changes to act as a benchmark. The left-hand-side panels show the distributions for all staff, the right-hand-side panels show the distribution for staff with at least 20 years of tenure.21 The top panels show the distribution for all years, the bottom for 1902-05. A number of important features of wage adjustment at the VR are evident from Figure 3. First, there is a striking absence of wage cuts. In each of the four panels, the area underneath the bars to the left of zero is well less than the area underneath the benchmark normal distribution. Even among senior staff, wage cuts were rare. When data for 1902-05 is excluded, there is an almost complete absence of cuts. Second, there is a strong tendency for increments to cluster at zero, with approximately 27 percent at exactly zero. Among senior staff, this figure is closer to one third over the entire sample period and three quarters in 1902-05. Third, there is little support for the hypothesis that menu costs prevented wage cuts. Small wage cuts were, in fact, rare, but small wage increases were common. Approximately 18.5 percent of observations have wage increases of less than 2 percent. Table 3 provides further summary statistics of nominal and real wage changes, showing the mean and median increments and the proportion of negative or zero increments. The figures are presented separately for different sub-samples of workers, and for 1902-05 and the remaining years. As would be expected in a neoclassical spot labour market, the mean and median nominal increment was lower and the proportion of zero increments and wage cuts was considerably higher in 1902-05 than in other years. Table 3 also shows a sharp discontinuity at zero nominal change. Even in 1902- 05, relatively few staff received wage cuts and senior staff experienced cuts only about one seventh as frequently as zero increments. A second observation is that zero nominal increments were more sensitive to the business cycle than were cuts. Between 1905 and 1921 about 20 percent of observations had no wage change, in 1902-05 this figure was about 65 percent. Table 3 also shows that blue collar workers, whose jobs often relied on physical strength, were approximately twice as likely as white collar workers to experience unchanged nominal wages or cuts. Finally, Table 3 provides strong evidence that DNWR had consequences for real wage adjustment. The absence of nominal wage cuts meant that the mean real increment was higher and real wage cuts were much rarer in 1902-05 than in the later years of the sample period. To further examine the determinants of the different outcomes, we have run multinomial logit regressions on nominal wage changes. The dependent variable takes on three discrete outcomes: wage cuts, unchanged wages, and wage increases. The independent variables are as follows: tenure (and tenure squared); age; the inflation rate; the change in the number of permanent staff employed by the VR; and dummy

21 We believe that senior workers would have been much more likely to receive wage cuts than their junior counterparts because most training took place early in the careers of railways workers and because senior workers would have been more likely to be suffering declining physical strength. Thus we have run most empirical tests on both the full sample and a restricted sample of staff with more than 20 years service. Sammartino (2002) finds that increases in tenure had little effect on wage growth after about 15 years at the VR.

15

16

variables for branch, changing position, promotion, demotion; and blue and white collar. The expected signs on the coefficients are drawn from the basic model of human capital. We expect that increases in age and tenure will increase the probability of a wage cut, as on-the-job training typically occurs early in a worker’s career and thus junior workers would have been more likely to experience productivity increases. We expect wages to be tied to position (as in tournament models) and thus expect promotions to be accompanied by wage increases and demotions by cuts. We expect fewer wage cuts during periods of high labour demand. We proxy demand by the change in the number of staff employed at the VR, and expect that this variable will have

17

a negative coefficient.22 We expect fewer wage cuts during periods of high inflation, as neoclassical models of labour markets imply that workers and firms bargain over real wages, and thus nominal wages simply follow inflation. Finally, we include branch dummies (locomotive, traffic, and ways and works) and blue and white collar dummies to capture the effects of the separate internal labour markets. We expect that white collar workers would have been less likely to receive wage cuts than others, as their positions did not rely on physical strength. We expect that the Locomotive Branch workers, who went on strike in 1903 over previous pay cuts and whose pay was reduced following the defeat of the strike, were probably more likely to receive cuts, but otherwise we do not have strong a priore expectations about the signs of the coefficients on the branch dummies. The results of the regressions are shown in Table . The regressions have fairly strong explanatory power. Most of the coefficients are statistically significant and have 4 signs that are in accordance with the predictions. Wage cuts and zero increments were relatively more likely for senior workers, in years with low inflation rates, and in years when there was a decrease in staff numbers. Wage cuts were also much more likely for demoted workers and less likely for promoted workers. Zero increments were less likely for both promoted and demoted workers. Three other results deserve further

22 In a competitive labour market, wages would not be related to growth in the number of staff as the labour supply curve facing each firm would be perfectly elastic. However, the VR was by far the largest employer in Victoria and a monopsony buy of some types of labour, and thus probably faced an upward sloping labour supply curve. An increase in its demand for labour would thus have increased both the wage rate and the number of workers it employed.

18

comment. First, consistent with the evidence from the raw data shown in Table 3, white collar staff were less likely to receive wage cuts or zero increments. The infrequency of wage cuts for white collar staff is very similar to that shown in Seltzer (2009) for the banking industry, suggesting that there was a broader white collar labour market which was characterised by DNWR. Second, wage cuts were very unlikely for all workers, except those being demoted. The results from Table imply that a 55 year old blue collar worker with 35 years tenure in the traffic branch who did not change positions 4 had only a 1.5 percent probability of a wage cut and probability of a zero increment between 1902 and 1905.23 If the same worker was demoted, the probability a 94.6 that he received a wage cut increased to 39.2 percent and the probability that his wages were unchanged decreased to 57.3 percent. Third, the coefficients on all the variables, apart from promotion and demotion, are very similar in the wage cut and zero increment regressions. This suggests that the VR effectively substituted leaving nominal wages unchanged for wage cuts in most cases where workers experienced productivity declines. In Table 5 we show the results of the same regressions using real wages changes as the dependent variable. We reduced the number of categories for the dependent variable to two (decrease/zero or increase) because real increments of zero comprise fewer than .5 percent of observations. Most of the main results are the same as in Table . However, one important difference is that the coefficient on inflation is significantly positive. This confirms the evidence from the raw data shown in Table 3 that real wages 4 moved counter-cyclically, and implies that DNWR had consequences for the adjustment of real wages. One possible caveat to the results presented above is that the triennial nature of the data may obscure patterns in annual wage changes. It is possible for a triennial wage increase to have included years with unchanged wages or even wage cuts, so long as they were offset by other years with a larger wage increase. A second concern associated with the low frequency data is that there may be an artificially low rate of observed wage cuts if individuals left the VR shortly after receiving a cut. It is not possible to observe the exact annual rate of wage cuts and zero increments from the VR data; however, there is indirect evidence to suggest that the patterns of wage rigidity might even be stronger in annual data than in triennial data. It is likely that almost all observed zero increments in the sample comprised three successive years of unchanged wages. It is also likely that many triennial increases contained one or two years of unchanged wages, particularly among more senior workers whose

23 Probabilities are calculated using the coefficients in Table 5 (regressions on the full sample). The formula is: ˆ µ EXP( ∑i β i Xi ) Pi =100 . ˆ µ ∑EXP( ∑i β i Xi )

19

return to additional seniority was low. This would imply that the annual rate of unchanged wages was somewhat higher than24 the triennial rate. Similarly, it is likely that the trienniums with wage cuts comprised one year in which the individual was demoted and received a pay cut and two years in which his wages were unchanged, implying that the rate of pay cuts in annualized data is lower than that observed in the triennial data. There is direct evidence that most of the cuts 1902-05 occurred on a single date in 1903. About 60 percent of the cuts made in this triennium were to workers in the Locomotive Branch (cleaners, firemen, or engine drivers). A 1903 Victorian Parliamentary debate notes that following the strike that following Engine Drivers’, Firemen’s, and Cleaners’ Association strike in May 1903, the Railway Commissions changed the payment scheme day for firemen (Victoria, 1903f). Although we can not be certain that all of the pay cuts for drivers and firemen, leading to pay reductions of 6d per day for drivers and 4d per received by Locomotive Branch staff were the result of this reclassification, we do note that only 2.3 percent of Locomotive Branch staff who received pay cuts were demoted during the 1902-05 triennium, whereas demotion was the rule rather than the exception in other instances of pay cuts in the sample. The extent to which selective exits could be obscuring higher incidences of pay cuts is limited because of the exceptionally low turnover rates at the VR. The observed exit rate

percent per year.25 Even if all exiting employees had received a pay cut in the previous averaged approximately 9.41 percent between triennial survey periods or about 3.04 triennium, the rate of cuts would still be relatively low. Moreover, there is little evidence to suggest that departing employees were particularly likely to receive wage cuts. Although we can not observe wages immediately prior to departure, it is possible to observe wage changes of departing staff in their last full census period. Baker, Gibbs, individual characteristics such as ability, work ethic, etc. lead to a correlation between adjacent wage increments. The and Holmstrom (1994b) argue that time invariant correlation between successive increments in the VR data is .392, and thus the final observed wage change is likely to be fairly closely related to the increment immediately prior to departure. We have computed the predicted probability of a pay cut for every observation using Table 5. Using the full sample, we estimate the mean probability of a wage cut and a zero increment to be 2.27 and 26.2 percent, respectively. For the 891 observations where the individual was not present in the next census, the predicted probabilities are 2.79 and 35.3 percent, respectively. In other words, the observable

Sammartino (2002) estimates that after controlling for entry the return to an additional year of seniority to be 242.39 -0.55 percent for workers with 10, 20, and 30 years tenure, respectively. 25 These figures are an upper bound of the true exit rate. It is only possible to observe exits if a member of staff was present, 0.14 in and one census period and absent in the next. It is not possible to observe staff with very short careers at the VR who entered and left between censuses. However, these staff would, by definition, have had low tenure and typically would have been young and at an entry-level position (where demotion would not have been a possibility).

have made them among the least likely to receive pay cuts. In other words, they would have possessed the characteristics that, according to the results shown in Table 4, would 20

21 characteristics of leavers suggest that they were only slightly more likely to receive a pay cut than stayers. An important finding in the literature is that, consistent with insider-outsider models (Linbeck and Snower, 1988), internal labour markets only shield incumbent workers from wage cuts. New recruits are not protected from the external labour market, and thus average entry wages may frequently decline from year to year (Baker, Gibbs & b; Seltzer and Merrett, 1999; Sammartino, 2002; Seltzer, 2009). We examine the first observed wage of new recruits to test this hypothesis.26 Figure plots Holmstrom, 1994 the average first observed wage of junior staff who entered the VR before their 20th 4 birthday.27 The top panel shows the average first observed wage of all first, second, and third year staff over the sample period. The bottom panel shows the average first observed wage, disaggregated to the branch level. It can be seen that year-to-year declines in average wages occurred fairly frequently for newly recruited junior staff. As a more formal test of whether entry wages declined from year to year, we have run

26Because the data are triennial, rather than annual, we observe entry wages only for 7 cohorts. Thus we consider the data means that individuals will have tenure between 0 and 3 years at the time of the first observed wage. first27 The observed natural wagetest for in thewhether top panel there of is Figure flexibility 4 in orderof entry to getwages a reasonable is to look sampleat the wagessize. The of juniortriennial staff nature in specific of the positions across all sample years. Unfortunately, hiring in the sample tended to be clustered in a few years and disaggregation below the branch level produced very small cell sizes.

22 regressions on the log of the first observed wage. As independent variables we include a series of cohort dummies, age, tenure, a series of branch dummies, and dummies for white and blue collar. The regression coefficients in Table 6 show the average wage premium (or penalty) for each cohort, relative to pre-1901 cohorts. It can be seen that year-on-year declines in both nominal and real wages occurred about as frequently as increases, with large and statistically significant declines occurring in 1901, 1903, 1907, 1910, 1912, 1915, 1916, and 1919. This is fairly strong evidence that outsiders’ wages were not protected from external shocks, and were subject to much more fluctuation that wages of insiders. Finally, in the absence of wage cuts, there must have been alternative mechanisms used to adjust expenditures. The budget cuts following the Irvine Government’s election adjustment following a crisis. Irvine had promised substantial budget cuts upon election, and, as the VR employed in June 1902 provide an interesting case study of approximately two thirds of State employees, a cut in overall State spending was tantamount to cut in the VR’s budget (Butler-Bowden, 1991). According to data from the Annual Reports, working expenses were cut by over 10 percent between 1901-02 and 1902-03 (from 2,050,875 to 1,835,950) and recovered little by 1905 (Victoria, Parliament, 1902c, 1903c, 1905c). However, as shown cuts of any magnitude were fairly rare between 1902 and 1905, except for those in the in Figure 2 and Table 4, wage Locomotive Department. Only 0.2 percent of staff received a cut of at least 10 percent. Savings on labour expenditure came primarily from three sources, two of which affected outsiders much more than incumbent staff. First, there was a hiring freeze with few workers hired in 1903 or 1905 and n 28 As shown in Table 6, staff who were hired this time entered on a significantly lower wage than those hired in 1902. Second, one in 1904. most of the temporary and casual workers were terminated (Butler-Bowden, 1991).29 According to data from the Annual Reports, these staff cuts were accompanied by decreases in train miles, passenger journeys, and freight tonnage, and we have found no evidence to suggest that remaining staff had to work longer hours or more intensively.30 Third, consistent with modern evidence that cuts to bonuses or non-wage benefits occur much more frequently than cuts to wages, existing VR employees lost their right to free or discounted travel (Butler-Bowden, 1991).

28 -18) had similarly low numbers. 29 AccordingThe sample to containsthe Annual an Reportsaverage, theof 101 number new ofrecruits temporary per yearworkers between dropped 1900 from and 3037 1920. in It1901 contains to 1599 only in 1902.43 new A recruitsregression from of 1903,the share none in from temporary 1904, and positions 54 from (using 1905. dataOnly available the War inyears the (1914Annual Reports from 1893-1903) on the national unemployment rate (from Vamplew LAB100) produces the following result (standard errors in parentheses): Share Temp = 22.89 - 1.19UNEMP (2.02) (0.23) This further suggests that temporary workers wereAdj. R2 used = .685, by the F =VR 27.14, to smooth N = 13 out fluctuations in the business cycle. 30 According to data from the Annual Reports, between 1902 and 1903 train miles decreased by 8.8 percent, 9.9 percent (Victoria Parliament, 1902e, 1903e). passenger journeys by 4.6 percent, and freight tonnage by23

6. Conclusions This paper has examined wage adjustment using triennial data from the Victorian Railways during the period 1902-21. The period was characterised by relatively low inflation and one triennium when both the Railway’s budget and the overall price level declined. The evidence indicates that there was substantial downwards nominal wage rigidity. Over the entire period, only 2.3 percent of nominal increments were negative, compared to 26.9 percent at exactly zero. Real wages were more flexible than nominal wages, but the absence of nominal cuts meant that real wage increments moved counter-cyclically. Multinomial logit regression analysis shows that wage cuts were more likely for older, more senior, and blue collar workers, and in periods with low inflation and low employment growth at the VR. Importantly, each of these characteristics also increased the likelihood of a zero increment, suggesting that leaving wages unchanged was often used by the VR as a substitute for cuts. There is strong evidence that, although wages of incumbent staff were rigid downwards, wages of new staff were much more flexible. Entry wages show strong cohort effects, and year-to-year decreases occurred about as regularly as increases. Finally, when the operating budget was cut by Parliament in 1902, the burden of the cuts fell predominantly on new recruits and temporary staff. At the same time, existing staff received relatively large real wage increases and do not appear to have worked longer hours. Taken as a whole, these results suggest that wage adjustment in at least some early twentieth century firms was very similar to the much more widely documented wage adjustment since the Second World War.

Acknowledgments:

We would like to thank Ben Jensen, Janine O’Flynn, Yvette Petersen, forReykjavík their help and in atcollecting the Australian and encoding Economic the data.History We inalso the wish Long to Runthank Conference Jeff Borland, in TimCanberra Hatton, for Diane comments Hutchinson, on earlier Tim draftsLeunig,. SammartinoDavid Merrett, has Jeff received Williamson, funding and seminarfrom the participants University at of the Melbourne, ISNIE conference Faculty in of Commerce. Remaining errors are ours alone.

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Minerva Access is the Institutional Repository of The University of Melbourne

Author/s: Seltzer, A; Sammartino, AS

Title: Nominal wage rigidity prior to compulsory arbitration: Evidence from the Victorian Railways, 1902-1921

Date: 2011

Citation: Seltzer, A. & Sammartino, A. S. (2011). Nominal wage rigidity prior to compulsory arbitration: Evidence from the Victorian Railways, 1902-1921. Cliometrica: journal of historical economics and econometric history, 5 (1), pp.53-78. https://doi.org/10.1007/s11698-010-0050-3.

Persistent Link: http://hdl.handle.net/11343/145392

File Description: Accepted version